The Debt Crisis Scenario

Check out the accompanying pdf and chart collection. Executive Summary: Are we headed for a debt crisis? Demand for Treasury bonds has fallen in the wake of Fitch’s federal debt downgrade at a time when supply has been escalating. Rising yields in response may clear the Treasury market but also reduce both demand for and supply of the private sector’s credit. A credit crunch and recession could ensue, possibly setting off a deflationary debt default spiral. … But that worst-case scenario isn’t inevitable. The Treasury bond yield may not soar above 5.00%, as increasingly feared, given our expectations for “immaculate disinflation” (i.e., without an economy-wide recession) and slowing real GDP growth. … Also: Joe’s analysis suggests the S&P 500’s Q3 earnings may hit a record high.